How to Refinance Credit Card Debt

Taking steps to get a handle on your credit card debt shows real determination—it means you’re ready to make things easier on yourself and your budget. 

Credit card refinancing could make your credit card debt easier to manage in two major ways:

• You might be able to lower the cost of your credit card debt by lowering the interest rate you pay on it.

• Refinancing could make your monthly payments more manageable. One way to do this is consolidating multiple payments. You can also restructure your debt to make payments more predictable and affordable. 

A variety of tools are available to help you refinance. These include balance transfer credit cards, personal loans and home equity loans.

So what's the best way to refinance? There's no one-size-fits-all answer to that. The right method for you depends on the details. These include financial resources, credit standing and the type of debt you have currently.

We’ll walk you through  the possibilities. You'll learn about some of the issues to consider when deciding whether refinancing your credit card debt makes sense. You'll also find information that will help you choose the best way to refinance for your situation. If refinancing does not fit your situation, there are other alternatives such as debt settlement programs and counseling.

Ultimately, this is about making your life easier. Refinancing could make your credit card debt easier to afford, more manageable, and less stressful. 

What Is Credit Card Refinancing?

Refinancing means using one debt to pay off another. What you accomplish by doing this depends on the type and terms of the debt. 

When you refinance credit card debt, you either move the balance to a different credit card, called a balance transfer, or you use a loan to pay off your credit card balance. In either case, a key goal is to lower your interest rate.

Credit card refinancing vs. credit card consolidation

Credit card refinancing and credit card consolidation can happen at the same time, but they aren't the same thing. Debt consolidation bundles multiple debts together, typically by using one large loan to pay off multiple smaller debts.

For example, if you're using one balance transfer card or loan to pay off multiple credit cards, you're consolidating your credit card debt. The benefit of consolidation is that you can turn multiple monthly payments into one monthly payment. This could make it easier to stay on track.

If you have just one credit card debt, you don't need to consolidate. Still, you may have something to gain by refinancing. Getting a lower interest rate or more favorable payment terms could make that debt more affordable.

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Steps and Methods to Refinance Credit Card Debt

The first step in refinancing is to assess your current situation. Here are some key things to know:

1. What is your current debt? 

List all your current debts. This includes credit card debt as well as any loans you have outstanding. While credit card debt is generally the best target for refinancing, you should look at your entire debt picture. This will help you understand:

• Which debts to refinance

• What type of refinancing might be available

• How much you can afford to pay each month.

So make a list and note the balance due, interest rate, and monthly payment for each debt.

2. How much income do you have available for monthly debt payments?

Look at your take-home pay, and then make a note of what you're regularly spending money on. 

Everyone has essential expenses, such as housing costs, utility payments, and grocery bills. In other words, these are the necessary costs to keep your life running. Include your current debt payments with the essentials.

Some things could be considered luxuries, such as meals out, entertainment, sports events, and streaming services. Luxuries, or wants, are optional expenses you could survive without. 

Separate the needs from the wants, and add  up the essential expenses. Now decide which optional expenses you're willing to cut and which you want to keep. Total up the cost of the luxuries you want to keep and add that number to the cost of necessities.

Compare this combined total to your take-home pay. If it isn’t a smaller sum, you've got more work to do. If you're spending more than you take home, you have to rely on continued borrowing to make ends meet. That isn’t sustainable in the long run. Consider how you could cut more expenses or increase your monthly income, or both. These measures don't have to be permanent. Once you get rid of credit card debt, that should leave more money in your budget to spend how you want.

The goal is to get your spending budget to be less than your monthly income. Figure out the difference between your monthly income and that new budget. Then add this difference to your current monthly cost of debt. The result tells you how much you'll have available for debt payments each month. 

3. Find out your credit score.

Your credit score will give you a general idea of whether you'll be able to borrow money to refinance your debt. Your credit score also impacts the interest rate you'll be able to get. 

Other factors go into qualifying for credit, but your credit score will give you some sense of how good your credit is. Credit scores are frequently separated into tiers such as the following:

You may find your credit score listed on your monthly credit card statements. All three three credit bureaus, Equifax, Experian, and TransUnion, offer free credit scores.

4. Do you have home equity, and if so, how much?

If you own a home, a home equity loan is a possible option for refinancing credit card debt.

First you’ll need to figure out how much equity you have in your home.

Start by getting an estimate of the current value of your home. Look at recent sales of similar properties in your neighborhood. Be realistic about how those properties compare with yours. Using some recent sales prices, make your best guess for the current value of your home.

Next, look at your remaining mortgage balance. Calculate your home equity by subtracting your mortgage balance from the value of your home.

Let’s say your home is worth $400,000 and you owe $300,000. You have $100,000 in equity:

400,000 - 300,000 = 100,000

Now that you know how much equity you have, you want to know the percentage of your home’s value that equity represents. 

To get the percentage, divide your equity ($100,000) by your home’s value ($400,000). Multiply the result by 100. That gives you the percentage of your home value: 

100,000 / 400,000 = .25

.25 x 100 = 25%

Lenders typically require 15% to 20% equity to borrow against the home. Most won’t let you borrow the full amount. 

Doing these calculations should give you a sense of how qualified you are to borrow to refinance credit card debt. That could help you decide which options might be right for you. 

Credit card balance transfer

A balance transfer moves a balance from one credit card to another. The goal would be to get a 0% interest rate on your balance for a specific period, making it more affordable to repay. You could also use balance transfers to consolidate balances from multiple cards onto one card.

Balance transfer cards work best when you:

• Have good to excellent credit. A good credit history will help you get a higher credit limit.

• Qualify for a 0% APR offer. The best balance transfer cards offer 0% interest for 12 to 21 months.

• Use a card with a low balance transfer fee. Most cards charge between 3% and 5% of the total transferred amount for each balance transfer.

• Have a payoff plan. Once your zero percent rate expires, you’ll pay the card’s regular interest rate on your remaining balance. 

Paying no interest sounds like a great deal, but keep in mind:

• You can only transfer balances that add up to your credit limit minus the balance transfer fee. For example, if the credit limit on the card is $10,000 and the transfer fee is 5% (making the fee $500), you could only transfer about $9,500. 

• Once the intro APR offer ends, your remaining balance will be charged interest at the ongoing rate. In recent years, the average rate on credit cards has been well above 20%. If you have a lower credit score, it may be above 30%.

• Avoid making new purchases on your balance transfer card. Focus on paying down your transferred balance before the intro rate ends.

The way to maximize the savings on a balance transfer card is to pay off the balance before the end of the introductory period. Before signing up, figure out whether the money you’ll save during that no-interest period will exceed the costs. Total costs could include balance transfer fees and the excess interest after the zero-interest period is up. 

Personal loan

Personal loans could be great tools for refinancing credit card debt because:

• You could use a personal loan for pretty much anything.

• Most personal loans have a fixed interest rate.

• Personal loans generally have a defined repayment period, so you also know how long it will take to pay off your debt.

• The combination of a fixed interest rate and a defined repayment period means you’ll have consistent monthly payments. 

• Personal loans generally have lower interest rates than credit cards.

The potentially lower interest rate could be the most important thing. Rates for both personal loans and credit cards depend heavily on how good your credit is, but the average rate for personal loans is significantly lower than a credit card. The lower you can get your APR, the less interest you’ll pay. 

The interest rate you can get on a personal loan will primarily depend on: 

• Credit history

• Income

• Existing debt

• Whether you can offer collateral 

Besides offering you the chance to get a lower interest rate, personal loans offer more certainty than credit card debt. This comparison helps illustrate why:

To sum up, credit card debt involves some variables, including the fact that you can continue adding to your balance. These variables mean you can’t know up front how much you're going to pay each month, how long it's going to take to repay the debt,and the total cost of repaying the debt. 

Personal loans don’t have these variables: you agree to all those factors  when you sign up for the loan. That makes a personal loan easier to plan for from month to month and long term. 

Personal loans work best if your credit is good enough for you to qualify for a relatively low interest rate, which could make the loan more cost-effective. Also, it’s good to sketch out a a budget plan to make sure you'll have money for the monthly loan payments.

Home equity loan or HELOC

Another loan that could refinance a credit card is a home equity loan or a home equity line of credit (HELOC). Both use your home as collateral to secure your debt. Collateral is a financial safety net for the lender. If you don’t repay the loan, the lender can sell your collateral to recover the money you owe.

With a home equity loan, you borrow a specific amount all at once and repay it over a set schedule. A HELOC works more like a credit card. You can borrow money at different times, up to your limit, for the first few years of the loan. If you pay down your balance, you could borrow more.

Using your home as collateral is likely to earn you a lower interest rate than you’d get on a credit card or personal loan. However, there’s a tradeoff. 

Credit card debt is unsecured, and a home equity loan or HELOC is guaranteed by your home. If you can’t pay an unsecured debt, your account may go to collections but you won’t lose your home. If you pay off your credit cards with a loan that uses your home as collateral and then you struggle financially, you risk losing the home. 

Comparison of credit card consolidation methods

Here's a quick look at how the three credit card consolidation methods compare:

Credit Card Refinancing Requirements

A lender will want to look at the following when you apply to refinance credit card debt:

• Your credit report. A credit score of 670 or better may be considered good, although loans and balance transfer cards may be available for people with lower credit scores. Lenders are likely to look beyond just your credit score. They may also want to look at your credit reports to learn how you've handled similar forms of financing in the past. 

• Your debt-to-income (DTI) ratio. This is the percentage of your monthly income that goes to debt payments. There’s no hard-and-fast-rule for the percentage, though generally the lower the better. If your DTI is below 40%, you should be in good shape to qualify for credit. As it approaches 50% or more, you’ll likely have fewer options. The importance of DTI depends on the strength of your other qualifications.

• Your home equity, if applicable. You can estimate home equity yourself, but a lender is likely to ask for a formal appraisal before making a home equity loan. They'll want you to have at least 15% to 20% in equity. The amount you can borrow depends on how much equity you have.

• Your employment history. Your income matters when you apply for a loan. A lender will often want to contact your employer to verify income and ask about your length of employment. The longer you've been in your current job, the better. Another factor is whether you have a stable salary or variable wages, from freelance or commission-based income.

Your qualifications don't just affect whether or not you get a loan, but also the loan terms. Your ability to get a favorable interest rate affects how worthwhile it would be to refinance credit card debt.

If you're unable to qualify for a loan, you may have to consider alternatives to refinancing such as debt settlement.

Is it a Good Idea to Refinance Your Credit Card Debt?

Refinancing your credit card debt can be a very good idea under the right conditions. Ideally, refinancing your debt should lower your interest rate and/or give your debt more of a structure that keeps repayment on track. 

Refinancing credit card debt also frees up your credit limits, which could open the door to  more credit card spending. 

If you refinance credit card debt, it’s best to make it part of a broader debt reduction plan. That should include keeping a budget so you can make your payments and not depend on additional borrowing. 

When Credit Card Refinancing Might Not Work

Refinancing your credit card debt could have multiple benefits, but it may not be right for every situation. 

Credit card refinancing might not work in these circumstances if you:

• Already have too much debt. If your monthly debt payments are half or more of your income, your DTI may be too high for you to qualify for new credit. Even though your new debt would  replace old debt, a new creditor may not be willing to take on the risk of a high DTI. Even if you're able to qualify for credit, a high DTI could prevent you from getting attractive terms, and refinancing probably wouldn’t be cost-effective. 

• Are struggling to keep up with monthly payments. One advantage of credit card debt is the variable monthly payments that give you some flexibility when money is tight. With a loan, you wouldn't have that flexibility. As for a 0% interest balance transfer card, the 0% rate only applies for a limited period. You might have to make fairly substantial payments each month to pay off the debt before that period is up. 

• Have a seriously damaged credit score. If you have poor credit, your borrowing options may be severely limited. This means you might not be able to get new credit, and if you can it might not be at  terms that are cost-effective.

• Haven't been able to live within your means. Refinancing alone may not be enough to get rid of debt. If you’re going to rely on continued borrowing to make ends meet, you'll build your old balances back up before you can pay off the new debt. Refinancing should be part of a broader plan to start living within a sustainable budget.

If refinancing isn’t a suitable solution for you, there are alternatives you can consider. 

If you need debt relief in Colorado (or anywhere else in the country), explore your options. The first step is the most important one—find out more today.

2 Alternatives to Refinancing Your Credit Card Debt

Refinancing credit card debt may not be the right approach for everyone. You might need to consider other approaches if any of the following apply to you:

• You’re not comfortable choosing the right loan or credit card to refinance your debt. 

• Your credit history isn't good enough to qualify you for new credit.

• You wouldn’t be able to afford the monthly payment, even if you refinanced your debt.

Here are two alternatives to consider.

Debt management plan

A debt management plan (DMP) has you work with an accredited credit counselor, who will help you enter into voluntary agreements with your creditors. With the counselor’s help, you list your debts and make a budget. You'll probably have to agree not to use credit while you’re enrolled in the plan.

The counselor will contact creditors on your behalf to negotiate fee waivers or a lower interest rate. These negotiations don’t reduce the amount you owe. 

Once your creditors approve, you’ll make a single monthly payment to the credit counseling agency, and the money will be sent to each of your creditors. Part of that payment will go towards a fee for the DMP, and there may be a fee for setting up the plan.

The payment on a DMP is designed to fully repay your unsecured debts in three to five years.

Debt settlement

Debt settlement, or debt relief, is a process where you negotiate with your creditor or debt collector to accept less than the full amount you owe and forgive the rest. Creditors might be willing to do this if it’s clear you can’t afford to fully repay your debt. 

You could settle debts yourself or hire a reputable company like Freedom Debt Relief and let experienced debt experts do the heavy lifting for you.

Debt settlement may be a good fit if:

• Your credit is too damaged for you to qualify for new credit at reasonable terms

• You have so much debt you wouldn't be able to afford your monthly payments even after refinancing. 

You can try to negotiate with creditors yourself or work with a professional debt settlement company like Freedom Debt Relief. Working with an experienced professional who’s been through the process many times before may help you get a better deal. 

Since 2002, Freedom Debt Relief has helped over a million customers settle more than $20 billion in debt. 

Settled debt will be reflected on your credit record and may be considered taxable income in some cases. However, if there's no other way you can pay what's owed, debt settlement might be a way out.

Making the Right Choice for Your Situation

If you're struggling with debt, don't give up hope because you have options.

The right solution depends on your situation, and the best answer for you might not be the best one for someone else. You deserve a solution that fits your needs.

Assess your refinancing options and possible alternatives in light of:

• The type and amount of debt you have

• The income you have available for monthly debt payments

• Your credit history

• The availability of home equity

Even if you're not struggling to keep up with credit card payments, you might gain something by refinancing credit card debt. Lowering the cost of your debt could give you some breathing room in your budget for your current life or so you can save for the future. 

The big thing about dealing with debt is that it’s better to act now. Don't put off handling the problem—the sooner you address your debt, the better your options are likely to be.